UK: Will RTD tax hike hit industry?

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The UK budget, announced by Gordon Brown yesterday, has received a mixed reaction from the drinks industry, after it was revealed that duty on wines, spirits and beer would be frozen, but that RTDs would qualify for a higher tax bracket.

Speaking to just-drinks, deputy chairman of the Wine & Spirit Association (WSA) Joanna Delaforce called the change in RTD tax a "disaster" and predicted the tax would not work.

"The Chancellor is taxing British innovation and success with this huge 65% increase in tax on spirit-based coolers (also known as designer drinks)," the WSA said. "These products compete with beer so putting the duty on a level with spirits is unfair and will backfire.

"As in several other countries, producers will switch to basing their products on beer or wine rather than spirits, so no revenue will be gained."

The Gin & Vodka Association (GVA) said it was "extremely disappointed at he massive tax hike on pre-packaged spirits"

It called the move "anti-competitive" and "a tax on success and innovation".

Edwin Atkinson of the GVA said: "We are extremely disappointed that the treasury seems to have taken no consultation on this whatsoever."

The WSA predicted that the tax hike would add an extra 12p to the price of 275ml bottle.

However, beverage analyst with WestLb Panumre, Stuart Price believed the tax increase would have little effect on the industry. "We believe that there is no material impact on the likes of Allied Domecq and Diageo supplying this market.  This is because we believe that the full tax increase will be passed down the supply chain and onto the end consumer, he said. "Our econometric work leads us to believe that this increase will be passed on more by the publicans and restaurateurs (who will also use the opportunity to pass on other  operating costs) than the supermarkets."

He went on: "We do not believe that the higher tax and higher prices will materially affect end-demand because we do not believe that demand is especially price sensitive. It is led more by brand-preference and is geared more towards the youth end of the market.  Research from NFO shows that if RTD customers cannot find what they want in one bar, 40% will switch to lower profit drinks or go to another bar, taking their friends with them."

Both trade organisations, though, welcomed the freeze on duty on wine, spirits and beer. The WSA said: "The Association is pleased with the second successive freeze on wine, beer and spirit duty. However, since one in six bottles of wine drunk in this country are bought in Franc, the effect on a freeze does little to stem the tide of cross border shopping."

The WSA predicted that more UK retailers would be forced to open branches in Calais.

The industry also approved of the having in tax on small brewers in time for the football World Cup.

He said: "It goes a little way towards addressing the long-term problem of high duty rates in the UK which is depressing consumer demand and leading to an increase in illegal imports of beer. We would, however, have preferred the Chancellor to have been more radical in terms of his approach because duty on beer in the UK remains several times higher than in northern European countries."

Companies: Allied Domecq, Diageo

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